Canadian VC Rising, But Still Looks Dismal

In the Great White North, Canadian venture capital remains cool.

But there is hope of a robust venture market to come, according to the latest quarterly report from the Canadian Venture Capital Association (CVCA), released last week.

“This is another down quarter,” admits Robin Louis, president of Ventures West Management, who currently serves as president of the CVCA. “Venture disbursements are substantially below where they were a year ago. And investment activity is continuing to go down in Canada.”

But there is an up-tick.

Canadian venture capital disbursements rose 52% between quarters, from $181 million in the second quarter to $275 million in the third quarter ended Sept. 30. While it’s a significant jump from quarter to quarter this year, the amount disbursed remains 36% lower than the third quarter of 2002, when Canadian VCs pumped $429 million into startups.

While the number of companies remained about the same between the second and third quarters this year, with 196 companies getting funding in Q2 compared to 191 in Q3, a total of 216 companies were funded in the third quarter of last year.

This represents a 12% dropoff in the number of companies receiving funding in comparable periods.

The CVCA reports that one of the reasons for the decline from last year is that larger venture deals are on the wane.

Whereas deals totaling over $15 million accounted for $98 million in disbursements for Q3 2002, such deals only accounted for $21 million of disbursements in Q3.

Meanwhile, venture capital fund-raising also moved at a glacial pace. Canadian VC firms brought in only $114 million in investments from limited partners. Most of that funding came from the labor-sponsored venture capital credit (LSVCC) program.

“Canada’s a different fund-raising market than the U.S.,” says Louis. “There’s a really small number of private equity investors in Canada and a really small number of venture capital funds. You’re going to see a restrained fund-raising environment here in Canada compared to the U.S. for a while.”

“Last year we had strong fund-raising and that was in contrast to the United States,” says Kirk Falconer, the director of research for Macdonald & Associates, the research firm that conducts the study for the CVCA.

But 2003 has so far not been good to Canada. The second quarter of 2003 saw Canadian venture capital’s worst fund-raising since 1996, as it dropped 33% below the second quarter of 2002.

At the same time, the United States has had relatively stable investment activity lately and Louis hopes the Canadian investment activity will mirror the U.S. as it starts to gain momentum and continue to rise.

“After a tumultuous past few years, when investment skyrocketed and then fell precipitously, venture investment in Canada seems to be settling into a stable, albeit relatively low, level of activity,” Louis says.

While the overall numbers may be depressing for Canadian VCs, there have been some bright spots on the horizon.

Louis’ firm, Ventures West, held its first close for Ventures West VIII last week with $119 million, making it the largest fund raised in Canada so far this year.

The firm has another nine months to close the fund, which will be capped at $177 million, the same amount of Ventures West VII, which closed in 2000.

Earlier this year, the Canada Pension Plan Investment Board (CPPIB) announced it would increase its commitment to new and existing private equity funds by over $395 million. The Toronto-based investment management board is allowed to invest 10% of its total portfolio into private equity.

The investment board said the move was to diversity its portfolio as well as the portfolio of the Canada Pension Plan.

The CPPIB is an independent firm that invests funds from the Canada Pension Plan, which has a portfolio of approximately $44 billion.

It began investing in private equity in June of 2001.

“I do look for things to bottom out for a while and to get better,” says Louis. “I don’t see any huge rapid rise, but investment activity will go up in the fourth quarter and go up next year.”

Email Matthew Sheahan